The Saskatchewan Insurance Council has changed its controversial guidelines for marketing segregated funds. The new document, due to be published on October 16, is expected to take a much softer stance.
In June, the Council published a document entitled Proposed guidelines for the marketing of segregated fundswhich sets out guidelines to be followed at a disciplinary hearing to determine whether a licensee has breached council regulations.
The document suggests that licensees introducing segregated funds to the market familiarize themselves with the principles of investment and asset allocation. Licensees were also strongly encouraged to disclose the underlying investments within the segmented fund and ensure that their clients were aware of the risks associated with using leverage to invest.
The council was forced to withdraw this guidance after encountering significant opposition from organizations and individual advisors who submitted written objections or voiced their grievances in open forums in Saskatoon and Regina.
Many critics worried that the guidelines were actually prohibitive regulations, similar to those the Mutual Fund Dealers Association uses to regulate mutual funds. In fact, the Council’s proposal started with a direct comparison.
“Marketing of segregated funds is regulated but not subject to specific regulation similar to the MFDA,” the document stated. “Mutual funds and segregated funds have similar structures and results. The only notable distinguishing feature is the guarantee of the main component of segregated funds.”
The committee behind the initiative has created a new document in the form of what are now called guidelines, says John Waugh, the council’s director of compliance.
“The council will read the committee’s recommendations and review what they have heard from the industry and what they have heard in open forums to determine whether the new document addresses these concerns,” he says. “What comes out will be completely different from what was in the first version.”
One organization that expressed concern was Advocis. Sara Gelgor, vice president of regulatory affairs at Advocis, says the council was unaware the document was being interpreted as a new regulation.
“The format (format indeed) introduced some new requirements. We heard from the Council that this was not its intention. Their intention was to provide guidance in relation to existing rules,” says Gelgor.
Gelgor believes the guidelines will be more in line with the principles-based approach that her organization strongly supports.
“The council was very open to consultation. They are very interested in hearing the industry’s perspective and I am sure they will take into account the industry’s views. Any initiative from the Council is not intended to impose further rules,” he says.
In the US, insured investments are considered investment products and are regulated by the Securities Exchange Commission, while in Canada they are monitored by insurance regulators.
Critics of the Canadian system have argued that a separate set of regulations for mutual funds and segregated funds is unfair and that sellers of segregated funds must be held to the same standards as sellers of mutual funds, and vice versa.
Waugh says the council initiated the proposal because its principles-based policy definitions were unclear and caused confusion.
“During various (disciplinary) hearings, the Board noted a misunderstanding on the part of licensees as to the extent to which these policies could be applied when a complaint was received,” Waugh says. “What does it actually mean to act in the consumer’s interest, maintain appropriate records or determine the consumer’s needs? They are very broad.”
The Board’s withdrawal is the opposite of what occurred south of the border, where the SEC recently adopted very comprehensive rules governing how variable annuities, a type of seg fund, can be sold.
The move followed years of complaints about agents selling seniors and retirees deferred variable annuities, which can defer any income for up to 10 years. Because most seniors require immediate income, in many cases deferred annuities are completely unsuitable for older clients.
Variable annuities as a whole are completely new to Canada and are represented by products such as IncomePlus by Manulife or SunWise Elite Plus by Sun Life.
Gelgor says Advocis may change its position if problems begin to arise, but he believes equity-based insurance regulation is the best way to protect investors in segregated funds.
“Until there is a reason to move away from this, we urge such regulators to continue to stick to rules-based models,” he says. “We certainly don’t see an avalanche of consumer complaints about segregated funds, and we don’t have an industry problem with advisors advising segregated funds. That’s why we don’t have a problem in the industry.”
Posted by Mark Noble, Advisor.ca, mark.noble@advisor.rogers.com
(10/12/07)
